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Iran's Startup Spring

The sun is streaming through the windows of a loft-like office where a half-dozen young tech entrepreneurs huddle over their MacBooks in sweatshirts and sneakers.

They’re putting the finishing touches to PowerPoint presentations in preparation for a pitch meeting with potential funders, who are visiting from Germany and Austria. When the investors arrive, the entrepreneurs, most in their twenties, nervously take turns displaying graphs and figures that promise sharp growth for their new ventures.

“Trello meets Slack on steroids,” notes one slide, describing a project-management platform that launched a year ago. Another predicts rapidly rising subscriptions for a remote-learning site, reads an article in Fortune, the New York City-based multinational business magazine published by Time Inc. Parts of the article follow:

With bean bag chairs scattered on the floor and a ping pong table next to the coffee machine, you could easily imagine this scene in Silicon Valley. But these startups are launching thousands of miles away. This is Tehran.

The business equation suddenly changed last year, as a result of Iran’s nuclear deal with the US, Europe and the United Nations. Iran agreed to rid itself of enriched-uranium stockpiles and, in exchange, western countries lifted many of the sanctions that froze Iran out of much of the world economy for years.

No longer is the country’s plentiful oil banned from world trade; many of its financial transactions are not blocked any more.

For the first time in years, American companies can do business in Iran through foreign subsidiaries (though many require Treasury Department licenses), opening the door to US investment in a $400-billion economy.

> Wave of Business Activity, Optimism

The result of these changes has been a wave of business activity and optimism. Only days after sanctions ended in January, Iran’s President Hassan Rouhani raced to Rome and Paris to hash out multibillion-dollar deals for auto and ship manufacturing, new airplanes, modern railroads, upgraded oil facilities, and much else.

Since then, executives from Germany, France, Italy, Japan, South Korea, and elsewhere have jammed Tehran’s hotels, which report being booked solid for weeks.

There are plenty of obstacles to new foreign business in Iran, as we’ll see. But for now, you could call this moment Iran’s Startup Spring.

“We see a substantial inflow of foreign investors wanting to find opportunities,” says Saeed Rahmani, CEO of Sarava, Iran’s first technology investment company, who once worked for in the US.

“If someone wants to invest in Iran, this is the right time to do it.”

The sunny loft space with investor presentations is the headquarters of the startup accelerator Avatech. Founded in June 2014, with backing from Sarava, it mentors young tech entrepreneurs, helps them find financing and trains them in how to launch a startup.

The number of Iranian startups has rocketed, from almost none at the beginning of this decade to at least 400 in Tehran alone, according to TechRasa, a local equivalent of TechCrunch, which tracks the sector. These startups occupy a tiny portion—less than 1% of GDP, by some estimates—of Iran’s oil-dominated economy. But their impact is potentially huge.

“Clients come in and are amazed just sitting in a place like this,” says Bahador Baradari, 31, a director of Gravity Partners, a Luxembourg-based consulting and investment company working in Iran, as we sip iced lattes in Tehran’s hip Sam Cafe, with the sounds of Frank Sinatra playing in the background.

Two-thirds of Iran’s 80 million people are younger than 35 and their share of the population is growing. Iran’s youths are better educated than any generation before them.

The country has the biggest proportion of engineering graduates in the world. They’re also vastly more connected to the outside world than their parents’ generation, despite being raised under sanctions.

“We want practical solutions, not slogans,” says Mohammadi, who was born five months after the 1979 Islamic Revolution. “And there are lots of us. We have a lot of potential. We have the potential to revolutionize this country within a decade.”

“For my dad’s generation, their whole goal was to get a job in a government organization,” says Mohammad Reza Azali, 28, co-founder and editor-in-chief of TechRasa, which was launched last July.

Azali, who says his father is an engineer at a state-run oil company, was set to move to Boston in 2014, until he discovered the startup community and decided to stay.

“I had a chance to work in the national oil company,” he says, but he didn’t want to work in a traditional state-run enterprise. “This generation is free. We do what we want.”

> Duress and Opportunity

Economic isolation created both duress and opportunity. Sanctions have bred a generation of do-it-yourself experts who have created their own services and products to replace ones to which they had no access.

Hence, there are substitutes for Amazon and Groupon, and an alternative Google Play, called Cafe Bazaar, which launched in 2010 and now hosts thousands of developers.

Last year, 3G and 4G Internet services expanded from one mobile operator to all three. The country now has an estimated 40 million smartphones in use. That includes millions of iPhones, even though Apple has no distribution in Iran; middlemen ship them in from abroad.

In the modern Elahieh shopping mall in North Tehran, there’s an ersatz Apple store, complete with a Genius Bar.

“There is this crazy momentum starting in Iran,” says Vahid Jozi, 30, who launched a data-analytics company, Kimlik, in Tehran in December.

Jozi, a dual Canadian-Iranian citizen, launched four tech startups in Canada. He arrived in Tehran last June on vacation and quickly decided it was the best place to launch his next company, seeing key advantages in Iran’s low wages and large numbers of skilled people.

“The return I get investing one hour in Iran is higher than almost anywhere else,” he says.

In 2011, a company called SabaIdea.com launched Aparat, a website that allows Iranians to upload video—similar to Google’s YouTube. Today Aparat is the sixth most popular website in Iran, according to Amazon’s tracking service Alexa. It has about 25 million unique visitors a month and more than six million videos are viewed daily, according to SabaIdea’s CEO Mohammad Javad Shakouri-Moqaddam.

He says he is planning to expand into the Middle East and Indonesia, using a network of producers creating original content. Yet he credits Aparat’s success to sanctions.

“We never would have started this had there been YouTube in Iran,” he says.

A similar need motivated Digikala’s Saeed Mohammadi. Back in 2007, he and his identical twin, Hamid, both avid photographers, were researching which new camera to buy and found no information available in Iran. So the brothers, both engineers, decided to create a homegrown version of Amazon. They quit their jobs and sold Hamid’s car and registered their company as co-CEOs.

With $20,000 in savings, they began selling digital cameras and mobile phones online. They now offer thousands of products. Nine years on, Digikala is estimated to be worth about $500 million.

The company has just moved into glassy new headquarters in North Tehran’s upscale Vanak neighborhood. The Nikon camera that inspired their startup sits on a table outside the top-floor conference room, which has a panoramic view of the Alborz mountains.

By summer, the twins plan to launch a marketplace platform on Digikala, with Iranian businesses paying a fee to appear on it—a potentially huge boost in revenues for the company.

And they say that since the nuclear deal in January, they have begun negotiating with investors from Britain, France and Germany.

> Good Future Despite Worries, Risks

Yet for many Iranian tech companies, it might not be easy to land big investment. That much became clear on the sunny morning in March in Avatech’s offices, when entrepreneurs pitched their startups to a delegation of about 20 seasoned German and Austrian investors.

The group, representing medium-sized businesses, had spent days touring factories and companies in Iran in search of investment prospects and the meeting was their last stop before heading to the airport.

To the startup execs, their presence felt crucial—concrete proof that the nuclear agreement might finally pay off with an influx of foreign capital.

“We need money and we need experience,” says Mohammad Rashidi, 27, CEO of Faranesh, a remote-learning platform he founded in 2014, as part of Avatech’s first batch of trainee entrepreneurs. He says Avatech’s program was essential in a country with “no knowledge at all about how to create a startup or raise funds”.

Two years after launching, he says, Faranesh has two million students for its 600 online tutorials and plans to begin offering courses later this year for the national university entrance exam.

“There is a huge gap between what is happening here and in Silicon Valley. We are 10 years behind,” he said.

In one presentation, Reza Rezaee, co-founder of Namlik, argued that Tehran’s gridlocked traffic—with millions trapped for long periods during their commutes—provided a perfect opportunity for his company’s curated audio content (or “Flipboard for audio,” as one slide put it).

He explained that Iran has no copyright laws. “You will get them,” said the investor.

There are plenty of other worries, too. Even now, conducting the simplest transactions in Iran remains intensely complicated. It is almost impossible for Iranians to make or receive international payments and foreign visitors need to bring thousands of dollars in cash to pay their bills, since there are no international banks or credit-card machines in Iran. Because US sanctions remain in place, no international bank has dared open for business in Iran, for fear of being prosecuted in the US, as BNP Paribas was last year; the bank pleaded guilty to criminal charges and agreed to pay an $8.9 billion fine for doing business in Cuba, Sudan and Iran.

“It traumatized the banks,” says Ardavan Amir-Aslani, a French-Iranian lawyer in Paris, who has recently negotiated French investment deals in Iran.

Like many crowding the hotels across Tehran, the German and Austrian investors who met the startup entrepreneurs say they were fired up by talk in Europe about an untapped, well-educated market of 80 million people, with urgent needs to fill after years of sanctions.

But at the tail end of their stay, many felt there are risks too including the imposition of steep import and export taxes in Iran, considerably raising the cost of doing business in the country. There is also little reliable data about companies on which to base their investment decisions.

“Iran does not have the rules and regulations of international business,” Mach says.

Despite that, Mach says that when those rules are in place and when the US sanctions are lifted, Iran’s large, skilled population—better educated and more numerous than any country in the Middle East—will be a magnetic draw for western companies.

“I foresee a good future,” he says. “But it will take longer than we think.”